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Pound Is Little Changed Before BOE Publishes Inflation Report

Pound Is Little Changed Before BOE Publishes Inflation Report

The pound was little changed, holding a two-day decline against the euro sparked by speculation the Bank of England will revise down its growth forecasts and boost its inflation predictions today. Sterling was within 0.6 percent of its weakest level in six months versus the dollar. The forecasts will be published at 10:30 a.m. in London and Governor Mervyn King will give a press conference to explain them. The Bank of England last week kept its asset-purchase target at 375 billion pounds ($587 billion) and its main interest rate at 0.5 per cent.

In other news, the G7 group of leading developed countries have sought to allay fears of a currency war when they agreed to avoid targeting lower exchange rates to secure a competitive advantage. Amid concerns that recent measures by Japan to reduce the value of the yen could escalate into tit-for-tat measures, the G7 said exchange rates should be set by market forces, not deliberately manipulated. The joint statement from G7 finance ministers and central bank governors reaffirmed the “longstanding commitment to market determined exchange rates” and pledged to “consult closely in regard to actions in foreign exchange markets”.

On the FX markets, GBP underperformed yet again, as market participants positioned ahead of the release of the latest Quarterly Inflation Report from the BoE on Wednesday, where it is widely expected that growth projections will be trimmed yet again. The pair was also weighed down by a firmer EUR, while the shorter-dated EUR/GBP implied vols rose to highest level since early June-2012. The ONS said that inflation in the UK has remained unchanged for the fourth month in a row at 2.7%. The official body also noted that price rises for alcoholic drinks in the post-Christmas period kept inflation high, while the drop in air fares that occurred during December was also reversed. The release comes a day ahead of the BoE’s latest Quarterly Inflation Report, where it is widely expected that growth projections will be trimmed yet again. In terms of technical levels, supports are seen at1.5546 which is the 30-day lower Bollinger level, followed by 1.5506 and then at 1.5490. On the other hand, resistance levels are seen at the 10DMA line at 1.5724, 1.5810 and then at 1.5845.

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